Detroit had no choice but bankruptcy, city says in response to creditors

Sep. 7, 2013

Lawyers for Detroit say the city was 'cash insolvent, budget insolvent and service delivery insolvent,' when it field for bankruptcy protection on July 18. The city also argues it attempted to negotiate with its unions and other creditors, but unions say there was an unwillingness to negotiate. / July photo by Carlos Osorio/Associated Press

Written by

Matt Helms, Brent Snavely and Alisa Priddle

Detroit Free Press Staff Writers

With more than $18 billion in debt and about 100,000 creditors, it was impossible to continue restructuring talks without declaring bankruptcy, the City of Detroit said in a court document filed Friday.

Along with the creditors, the city has nearly 50 individual union bargaining units and 100 separate bond issuances, “all of which rendered any out-of-court solution impracticable,” Bruce Bennett, an attorney for Jones Day, said in a 135-page document filed in U.S. Bankruptcy Court in Detroit.

The legal document is in response to 109 objections to Detroit’s eligibility for bankruptcy filed by the city’s creditors and more than 100 objections filed by retirees, city employees and other interested parties.

In a municipal bankruptcy, a city must prove it is eligible for bankruptcy protection. To be eligible, the city must be insolvent, must negotiate in good faith with its creditors and must have the proper authority from the state.

The city’s lawyers argue Detroit was “cash insolvent, budget insolvent and service delivery insolvent,” when it field for bankruptcy protection on July 18. The city also argues it attempted to negotiate with its unions and other creditors.

Detroit emergency manager Kevyn Orr’s position stands in contrast to the unions, whose leaders have said the city made its case with little opportunity for negotiation.

Many characterized the closed-door discussions as take-it-or-leave-it recitations of financial data with little time for questions from union leaders and an unwillingness among city officials and consultants to negotiate.

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Ed McNeil, special assistant to the president of the American Federation of State, County and Municipal Employees Council 25, the city’s largest union, said tonight that the city’s wasn’t willing to talk.

“What they’re saying is BS, as usual,” McNeil said. “We tried to get (Orr) to come to the table and he wouldn’t. We tried to meet with them. We tried to make ourselves available. We taped a letter to his damn door, and he still didn’t respond.”

The city denied that, saying in the filing that it sought counterproposals but didn’t receive anything concrete.

“No objector transmitted a written counterproposal on any aspect of the city’s restructuring proposal,” the document said, noting that some invitations to keep talking were rebuffed.

What’s more, U.S. bankruptcy code allows a city to file for bankruptcy if negotiations become “impracticable.”

“The city demonstrated the impracticability of conducting negotiations with its very numerous creditors,” Bennett said in the filing, noting the creditors also were fragmented and often didn’t have appointed representatives.

Some of the individuals who have filed challenges to Detroit’s bankruptcy have questioned whether the city is truly as broke as it claims. They suggest the city should have gone to greater lengths to sue banks for unpaid taxes on foreclosed homes or sue the state for additional revenue-sharing dollars.

Bill Nowling, a spokesman for Orr, who is spearheading the city’s bankruptcy petition, declined to comment tonight, saying the city would let the legal filing stand as its statement.

The state, in a separate legal filing today, also vigorously defended Detroit’s right to seek bankruptcy protection.

“(Orr) recommended the Chapter 9 filing having determined that no feasible financial plan could be adopted that could satisfactorily rectify Detroit’s financial emergency in a timely manner,” Assistant Attorney General Steven Flancher said in the court document. “The governor then approved the filing ... none of the numerous objections overcome this basic point.”

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One of the main arguments against Detroit’s eligibility has come from the city’s pension funds and others who say Michigan’s constitution bars the city from filing for bankruptcy because the constitution protects pension benefits. Bennett said in the city’s filing that no Michigan statute prohibits municipalities from filing for bankruptcy.

Orr has estimated Detroit’s pension funds are underfunded by $3.5 billion, and that benefits of the city’s 23,500 retirees will need to be adjusted.

“The Detroit General Retirement System will continue to work in good faith with all parties to ensure the best possible outcomes for Detroit, our members and beneficiaries,” said Tina Bassett, a spokeswoman for the retirement system.

The city also dismisses objections by two retiree organizations, which characterize themselves as the “natural representatives” on behalf of retirees. The city argues they are two of at least five associations that say they represent retirees, and there are no guarantees the two will agree on all relevant issues. The filing notes the city’s unions now claim to be representing retirees as well.

Orr’s office has since formed a retiree committee to be the voice of retirees at the bankruptcy table.

It has taken some cities more than a year to prove they’re eligible for bankruptcy protection, while some cities have had their cases rejected.

Federal Bankruptcy Judge Steven Rhodes has scheduled three dates to consider Detroit’s eligibility: Sept. 18, for arguments by the city’s creditors; Sept. 19, for individual retirees and other individuals; and Oct. 23, for a trial on other objections, such as whether the city negotiated in good faith.